Why the Alibaba IPO may be much bigger than you think
“Our mission is to make it easy to do business anywhere.”
You can tell a lot about a company from the mission statement it puts high up in its IPO filing. On the one hand, it can be pure bullshit: Lawyers won't nix it as long as it's too vague to be actionable. On the other, it will hang around your corporate neck for much of your life as a public company. So it better be right.
A good mission statement should neither be so humble investors think you're insecure, nor so impossible that people snicker at it. Make it just audacious enough. And, only if you think you can play with the big boys (“make the world more open and connected” “organize the world's information,”), make it so amorphously inclusive of your potential change that a reader might sit up in front of your prospectus and think, what the hell are they really up to?
Which brings us to Alibaba's F-1, the SEC filing for foreign companies issuing stock on US markets. Alibaba wants to make it easy for you to do business anywhere, which is an odd goal for a company as dependent on consumers as commercial enterprises. But Alibaba isn't your usual IPO, or even your usual tech company as we think of them in the US. But the rule of thumb for mission statements still applies: This IPO is going to make an impact on the US tech world. We don't know how much, but it's worth watching carefully.
Alibaba is the rare tech company with multiple creation myths. Its founder Jack Ma came up with the idea in a Hangzhou apartment, or a San Francisco cafe, or in Seattle when Ma tried an online search for beer. Or perhaps all of the above. None of that will matter to investors if Ma can raise more than $16 billion in Alibaba's IPO, the amount Mark Zuckerberg netted for Facebook nearly two years ago today.
Unless the market tanks, Alibaba may push to raise even more. Partly because one-upmanship games in IPO markets have a way of offering free publicity in a superlative-addicted press. Also because underwriters tend to float a conservative offering amount to see if they can ratchet interest even higher.
Either way, Alibaba may have already beaten Facebook: The company was valued at $168 billion last month, and an analyst at Bernstein pegged the value at $245 billion this week. That seems rich, but either number surpasses the $104 billion of Facebook at its IPO as well as its current $153 billion market cap. Amazon, perhaps the closest American counterpart to Alibaba in China, is worth a mere $137 billion.
In other words, this is no mere IPO. It may even be understating things to call this the IPO of the year – in a year when the IPO market has roared back. The effects on the market for tech stocks could be powerful and long lasting. If this offering tanks, it could throw enough cold water on tech IPOs to keep flames in embers for a couple of years.
But if, as seems more likely right now, Alibaba's IPO is a success, it could well reignite the fire underneath tech stocks that burned so bright for much of the past year. Two years ago, Facebook's IPO was supposed to do much of the same. When it tanked, the tech IPO pipeline clenched. But last summer, when Facebook showed strong mobile-ad growth, demand returned not just for recent tech IPOs but for many recently listed Internet stocks.
Facebook is still 58% above its offering price, but its ability to pull the entire sector higher has waned. Alibaba – more than Dropbox, Airbnb or any other US-based company going public this year – is likely to assume that mantle, especially because just as every US-based company aspires to go global, Alibaba is emblematic of dynamic online companies hoping to globalize their domestic successes into the American market.
Several years ago, starting with IPOs like Baidu and Sina, Chinese companies began tapping US markets for capital. Baidu became the sterling example – it's risen 1200% since its 2005 IPO against the Nasdaq's 90% gain – but a few dogs like RenRen (the so-called Facebook of China, down 80% from its 2011 IPO) and a series of scandals involving accounting of other China-based IPOs have tempered appetite among investors.
The relativity and opacity involved in transnational accounting notwithstanding, Alibaba has a checkered history on public markets. Ma listed Alibaba's stock on the Hong Kong exchange in 2007 then delisted it below the offering price five years later, citing, according to the Economist, the potential impact on employee morale and a desire to be “free from the pressure of market expectations, earnings visibility and share price fluctuations.”
There's no reason to think the pressure will be any more pleasant on this side of the Pacific, but again investors may not care when they look at the company's earnings. Alibaba's revenue rose 72% in last 12 months – on par with Facebook's current growth – while its operating income rose to 31 percent from 21 percent a year earlier. (Facebook's operating income was 36% last year.)
Alibaba's reported financials look even better when compared with Amazon. Amazon's net sales rose 23% in its most recent quarter, but it posted an operating margin of less than 1 percent. Amazon investors have grown accustomed to such thin margin gruel for their quarterly consumption, telling themselves that it's all invested into future growth – stagnant if not slowing growth, to be sure, but future growth nonetheless.
So what to make of Alibaba's expansion into new markets that could make a Bezos blush? Cloud computing, check; streaming video, check; third-party retailers, check. But also a mobile OS platform, ride sharing, e-learning, money-market funds, and more. Many of these initiatives may not prove to be worthwhile, but the same could be said of Amazon's forays like TV programming and smartphones.
It's not clear that Alibaba will be pushing hard onto Amazon's turf, but if it does then one thing will change. So often, companies have looked up to see the headlights of the big-rig that is Amazon's business speeding to turn them into digital roadkill. This may be the first time Amazon has had to face the glare of another company's high beams.
Alibaba remains an unknown quantity, but from the outside the company has all the signs of a rising technology star. Until now, the company's planned IPO has been discussed as something interesting, perhaps something that deserves more attention than one might think at first. But it may well be that the Alibaba IPO becomes much more than that. It could decide the fate of the tech IPO market this year – and in doing so it could decide the direction of many tech stocks.
More importantly, should Alibaba decide to leverage the attention generated from its IPO into a move into US markets, it could affect a lot of US tech companies. And that could make it harder for them to do business anywhere.